TFPD_08: A compliance check with a “hit” is a sanction breach

Trade Finance Paradigm #8: A compliance check with a “hit”
is a sanction breach

The next of the eight Trade Finance Paradigms is: A
compliance check with a “hit” is a sanction breach.

Coming back to the issue of sanctions. Although this is
relatively “new” to trade finance (at least no one told me about sanctions and
compliance when I started working in a trade finance department) – it seems
that there are some “fixed” paradigms surrounding it – making it impossible to
discuss it in a good and sober way.

Let’s take a look at some of the paradigms that seems close
to impossible to change:

1: Compliance Officers

For the compliance officers – trade finance is a deep and
nasty snake hole – full of toxic deadly snakes. No one knows what is down there
– and it must be “closed” so that no snakes are able to get out. Even the
smallest hole must be closed – because keeping a hope open could result in a
(small) snake creeping out and infecting/killing the whole department!

Or saying it another way – any possible risk of a breach of
a sanction must be removed 100% (110 if at all possible). Anything that can
happen – will happen! And trade finance is a “mess” of unknown parties, exotic
countries, many different kind of risks – and not least complex rules. Together
a deadly cocktail – from a compliance perspective.

2: The trade finance bankers

For the trade finance banker, compliance and sanctions are
simply poison! The trade finance instruments are independent of the underlying
agreement – well basically independent of the rest of the world. So the mere
talk about sanctions or even addressing the issue in the trade finance
instruments (like the LC) is like saying that it is possible to jump from one
cloud to another cloud merely by the energy that comes from signing a Gene
Kelly song!

3: The corporate customers using trade finance products

For the corporate customers using the trade finance
instruments the banks are the bad guys! The banks includes nasty, legal and
“impossible to read” sanction clauses into their trade finance instruments for
the sole purpose of being able to bail out of their obligation!

Do you recognise the above? And who is right and who is
wrong? Well – the good – and sad – truth is that they are all wrong – and they
are all right! The world is not black or white.

Let’s take a look at some of the finer nuances within trade finance:

Implementing good and sober compliance checks within trade
finance departments requires a perfect co-operation between the compliance
department, the trade finance department – and most likely a couple of other
departments as well. Each must respect the other parties – and trust that they
are professionals – and that they are aiming at the same goal: To do compliance
checks that does not “kill” the process (i.e. the products) – and are solid and
will be able to identify – and handle – any potential sanction breach. This can
of course be done in a number of ways – but the perception from the involved
parties is the key to success:

1: The trade finance bankers must acknowledge / accept that
this is something that must be taken seriously. This it is in fact in their own
interest to be able to do good and solid compliance checks.

2: The compliance officers must acknowledge that trade
finance products have their own characteristics – and that the compliance
checks must be made so that they support those characteristics. For example it
makes no sense requiring that the 2nd beneficiary must be subject to the
compliance check at the time of issuing the LC.

Similarly – it makes no sense imposing a requirement that a
full KYC check be performed on the beneficiary at the time of issuing the LC.

3: The compliance officers must also acknowledge, that
within the trade finance departments -
nothing is “straight through.” Okay – they do use computers – but everything is
done manually. Everything is being read by a human being. This of course has
its limitations – but it also has great advantages – and perhaps is a main
element missed by the compliance officers when implementing compliance
guidelines. In addition to the automated compliance checks – of course (say I –
with a trade finance background) the human factor is vital. The people working
within trade finance are professionals. They are specialists. They “examine”
each and every case carefully. So they have a really good chance of catching
what the automated compliance check do not catch! Most of those people can
“smell” a crooked case; by its commodity, by its value – or simply by the
wording used. Things that is hard to catch in an automated check.

4: The trade finance bankers must acknowledge – that for the
customers this is difficult! Besides managing the transaction as such: Whom do
we deal with? Can we ship product X – to country Y? They must also relate to
the complexity of the trade finance instruments. For example there may be a
confirming bank in a third country (i.e. a country different from that of the
applicant and beneficiary) – or it may be in USD – meaning that the payment
must pass through US. In such cases – the confirming bank and the
paying/reimbursing bank will do a compliance check – based on the regulations
to which they subject.

Therefore the trade finance banks must help and guide their
customers to navigate in these rough waters. This is in fact where the
“sanction texts” come in handy: If drafted well they will guide the customers
as to how they perform their compliance checks.

However – most of the “sanction texts” I have seen have been
drafted by lawyers – being really hard to understand … creating more damage
than good.

So – a huge responsibility lies on the banks regarding this.
The trick is finding the balance between doing what is necessary – and not
compromising the trade finance instruments.

5: The trade finance
bankers must acknowledge that this is complex – and that there are no easy
ways! So when there is a “hit” – this do NOT mean that there is a sanction
breach. It means that the case must be considered carefully. I.e. the bank in
question must investigate carefully if they are able to carry out the
transaction – and if not – then how to proceed.

Returning documents solely because there is a “hit” against
a sanction list is WRONG!

6: The corporate customers using trade finance products must
acknowledge that the banks must dealt with this. There is no way out. This is
not invented by the banks – but the banks have to comply. If not they may face
bigger problems than having an angry customer on the line! So changing bank to
a bank that has no sanction clause in (example) their LCs is really crazy.
However changing from a bank that has a sanction clause that seriously damages
their obligation under the LC to a bank with a sanction clause that – in a
clear and direct language explains the basis for the compliance check is
understandable….

Much more could be said about this … but I will leave this
to a future blog post :-) Here I will simply say that the good way to handle
this issue – is via an open mind, good cooperation – and mutual respect! I.e.
the same way as living a good life!

As such this blog post should signifies the end of the trade
finance paradigms … but I am “in flow” so why stop? So – at least – two more to
come: